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Business News

Construction sector builds momentum

The recovery in the construction industry strengthened in February as activity surged to an eight-month high, boosting hopes that the UK's economy will return to growth.

The latest Markit/CIPS Purchasing Managers' Index (PMI) survey for the construction sector - where a reading above 50 indicates growth - rose to 56.5 in February from 53.7 in January, as it continued to bounce back from the disruption caused by the snow in December.

There was a marked increase in housebuilding activity, which declined in the final four months of 2010, while civil engineering work grew at its fastest pace for three years and levels of commercial building work remained strong.

But the recovery in the construction sector is fragile and could be derailed by prices, which rose at their fastest rate since 2008, Government cuts and low levels of bank lending.

Some 53% of businesses said their costs increased since January, with prices of oil, fuel and steel showing particularly steep rises. Today's report echoes findings from the manufacturing sector where prices increased at near-record levels in February.

Levels of optimism about the future were weaker than January and the number of people employed continued to fall, the survey added.

CIPS chief executive David Noble said: "A weather-beaten UK construction sector is showing signs of repair, with stronger rates of activity and a rise in new business continuing the reversal of fortune since the end of 2010.

"The situation is still fragile considering the likely impact of Government cuts. Concern about the level of bank lending is also having a negative impact on confidence."

The figures suggest that the construction sector, which declined by 2.5% in the final quarter of 2010 and contributed to a 0.6% fall in GDP, should return to growth in the first quarter of 2011, said Sarah Ledger, report author and economist at Markit.

Howard Archer, chief economist at IHS Global Insight, said rising prices will put further pressure on the Bank of England to raise interest rates from their record low of 0.5%.

Construction was a significant driver of the UK's economic growth in the second and third quarters of 2010 but the difficulties now facing the sector mean it will not make a big contribution to the UK's economic growth for much of 2011, he added.

He said: "The construction sector does face a challenging environment and it is notable that sentiment in the sector slipped in February.

"Public spending cuts, still-tight credit conditions and a subdued housing market are particular problems for the construction sector. In addition, soaring input prices are squeezing construction companies' margins."